Hard inquiries will; soft inquiries won't. What's the difference? That's what we're here to help you understand. Read on to learn about the different types of inquiries and how they affect your credit score and ability to secure a loan.
What is a credit inquiry?
A credit inquiry is a request to pull an individual's credit report from one or both of Canada's credit bureaus, Equifax and TransUnion. There are two types of credit inquiries, hard inquiries and soft inquiries.
What is a hard credit inquiry?
A hard credit inquiry occurs when you authorize a potential lender to pull your credit report. Hard inquiries occur when you seek financing for a car or house, open a new credit card account, or apply for student loans.
Typically, each hard credit inquiry has a small negative impact on your credit score, regardless of whether the resulting loan application is approved. That doesn't mean you should avoid all hard inquiries-creditors expect occasional inquiries. Exactly how many inquiries are too many is up for debate, and depends on your credit situation. For most borrowers, dropping your credit score by a few points will not have a meaningful impact on your ability to secure a loan.
Hard inquiries have a slight negative impact because they reflect your desire to increase your access to financing and, as a result, potential debt. Multiple hard inquiries suggest that a borrower may be living beyond their means or desperately seeking another avenue to repay outstanding debt.
Credit bureau research support this, with data showing that borrowers with six or more inquiries on their credit reports are up to eight times as likely to declare bankruptcy as those with no inquiries. Still, inquiries are a minor component of your credit report, which is one piece of your overall credit worthiness.
Keep in mind that multiple inquiries and more new financing will reduce the average age of your accounts, which is another factor in your credit score. Taking on debt slowly over time makes sense financially, and that disciplined approach is reflected in your credit score.
What is a soft credit inquiry?
A soft inquiry may occur without your permission and does not come from a potential lender. This includes when you check your own credit report, which does not have any impact on your credit score.
Other common soft inquiries may be part of a background check or employment process, as well as those by credit card companies that send out mailers with special offers to prequalified individuals.
Some inquiries may register as hard or soft depending on how they're requested. These include
Ask the business checking your credit whether the inquiry will be hard or soft. Periodic monitoring of your credit report will help identify unexpected or inaccurate hard inquiries.
How long do inquiries stay on your credit score in Canada?
In Canada, the length of time an inquiry stays on your credit report varies by credit bureau. Equifax retains the information for three years; TransUnion keeps the information in your report for six years.
The impact of those inquiries is not constant, however. As with all aspects of your credit, recent events are weighted more heavily than those in the distant past.
Will shopping for the best credit rate impact your score?
It's a logical question: If multiple inquiries have a negative impact, wouldn't shopping around for the best rate have the same effect?
Not exactly, as long as you rate shop in a short time frame. The Financial Consumer Agency of Canada recommends keeping all hard inquiries for a single loan within a two-week period. Credit bureaus typically combine these inquiries into a single inquiry.
According to Equifax, they are required by law to post each inquiry-so all inquiries appear on the credit report-but those inquiries are scored as a single inquiry.
Will applying at different dealerships help?
If you go to several dealerships and apply several times, you are just applying to the same banks over and over. Most dealerships access the same financial sources, and once a bank has made a decision on you at one dealership, it won't change when you go to another.
The bank makes a decision based on you and your credit-not the person or dealership submitting your application. Automotive banks get frustrated if they see the same application come from different sources and may decline your application because they're worried you're trying to get more than one car or aren't being honest.
What should I do next?
Even though the lending institute will make the decision on terms and rates, you need a finance manager who understands the non-prime market and has a good relationship with buyers at these banks. A strong finance manager will work between you and the bank to negotiate and plead your case.
Langley Auto Loans has a team of experts dedicated to helping you make the right decision on your next vehicle and obtaining a financing plan that works for you.
Ready to get started? Fill out our free online credit application today.
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